Charitable deduction gets strong backing in Senate

The likely next chairman of the Senate Finance Committee and 32 other senators from both parties are calling for the protection of tax deductions for charitable giving if Congress embarks on comprehensive tax reform.

In a letter, dated Thursday to Sen. Max Baucus, D-Mont., the current Finance chairman, and Sen. Orrin Hatch, R-Utah, the ranking member of the panel, the lawmakers said the tax break facilitated more than $300 billion in donations to charitable organizations in 2012, supporting soup kitchens, afterschool programs and medical research projects.

“It is the only provision that encourages taxpayers to give away a portion of their income for the benefit of others,” the letter stated. “For this reason, it is not a loophole, but a lifeline for millions of Americans in need.”

Sen. Ron Wyden, D-Ore., signed the letter. He is the third-ranking Democrat on the panel and expected to succeed Mr. Baucus, who has been nominated as U.S. ambassador to China.

Mr. Wyden's support for the charitable tax break is a good indication of how he may approach tax reform as chairman of the committee, according to Marc Gerson, a partner at Miller & Chevalier.

“His words and his actions take on incredible significance in terms of shaping the [committee's] agenda, and the scope and direction of a future tax reform effort,” Mr. Gerson said.

Erin Baehr, owner of Baehr Family Financial, said she is happy to see lawmakers fortify the charitable-giving tax break.

“Almost every one of my clients uses that deduction,” Ms. Baehr said. “They will have a giving portfolio [consisting] of the organizations they support on a regular basis.”

Their contributions tend to fall in three areas — church, social relief groups and educational institutions — said Ms. Baehr, who asserted that sending private-sector money to local initiatives is more effective than funneling it through government programs.

“It's the only deduction we have that directly benefits the community,” Ms. Baehr said.

By protecting the charitable deduction, lawmakers would take off the table one of the biggest so-called tax expenditures. Between fiscal 2013 and 2017, the deduction — for everything other than education and health — will cost the government approximately $178.3 billion in tax revenue, according to the congressional Joint Committee on Taxation.

Eliminating or curbing tax expenditures likely will be required for legislators to achieve the widely held goal of lowering tax rates across the board and broadening the tax base.

If the charitable deduction is protected, advocates for other expensive tax breaks, such the mortgage interest deduction ($379 billion) and tax deferrals for defined-contribution retirement savings ($335.6 billion), will mount a similar defense.

“Could this start a trend?” Mr. Gerson said. “The more things you set aside and protect really limits the scope of tax reform, particularly with respect to potential reduction in rates.”

It was already a big challenge for Congress to tackle broad tax reform in an election year. The difficulty became greater when Mr. Baucus indicated he's leaving Capitol Hill. He had put out discussion drafts on corporate tax reform and tax administration, among other areas.

Now Mr. Wyden, who has introduced broad tax reform bills in recent years, will have to decide whether to pick up on Mr. Baucus' work or proceed in his own direction. House Ways and Means Chairman Dave Camp, R-Mich., intends to introduce a comprehensive bill soon.

Another indication of tax reform momentum could come in President Barack Obama's annual address to Congress next week.

“In the short term, it will be interesting to see what priority the administration places on it in the State of the Union,” Mr. Gerson said. “That could serve as a driving mechanism.”